Comments from Burgandy Asset Management

http://www.burgundy-asset.com/feb-99.asp

Too Many Regulators, Not Enough Regulation
Some free market ideologues would have us believe that regulation of all kinds is evil, and that if markets are allowed to operate freely, in financial services as in everything else, the world would be a better place. Tell it to the Russians. In the case of stock markets and financial systems, intelligent regulation is essential. The financial sector, with its vast amounts of the public’s money sloshing around, attracts crooks like no other area. Stern and consistent regulation is necessary to protect the public and maintain its confidence in the country’s financial system.
Canada’s current regulatory regime is execrable. Ten provinces share the responsibility for regulating securities markets with five stock exchanges and the Investment Dealers Association, in a world where national borders, let alone provincial ones, are increasingly irrelevant. Penalties for violations of securities laws, which are rare as hen’s teeth in any event, are applied on a province-by-province basis, meaning that scoundrels can always find a new playground. The money that is used to support small, inefficient and ineffective provincial securities commissions could be much better spent in ensuring that the public is not defrauded and bilked by any of the legions of flim-flammers who are attracted to any financial market, but especially a badly-regulated one like Canada’s. The only law obeyed in Canada’s capital markets on a national basis is Gresham’s Law, as provincial regulators and stock exchanges indulge in “one-downmanship” and take their standards to the lowest common denominator.
There have been recent reports that the provincial securities regulators have agreed on a “virtual” national securities agency, to be called the Canadian Securities Regulatory System (CSRS). They will pool their scant resources to try to eliminate some of the waste and inefficiency that make the current system so burdensome to the law-abiding and so helpful to the others. More money would be available for such things as compliance and enforcement, and some standardisation would be possible for prospectus filings. It might be progress compared to the current system, but would still be less effective than a full national securities commission. The main reason for the “virtual” structure appears to be that Alberta fears the domination of Ontario in the securities field, and petty interprovincial rivalries are a poor basis for joint action. We doubt if the proposed CSRS will get us out of the bush leagues anytime soon.

Lessons Learned – Regulators
A national securities commission is by far the best way to go. It is also, in the Canadian political context, probably an impossible dream. Quebec has not been in the habit recently of releasing any areas of control to the federal level, and Alberta’s and British Columbia’s fear of Ontarian hegemony in securities regulation (despite the smaller markets’ lack of resources to do the job) has scuppered any recent attempts to centralise Canadian regulation.
We should point out that the problems with the Canadian regulatory system are structural in nature, and our remarks are not aimed at the many hard-working and well-meaning individuals who work for provincial securities regulators. We have had some exceptional people working at securities commissions in Canada, but they are usually people who are not career regulators. Often, they are fast-track lawyers, joining the securities commissions almost on a pro bono basis. What is needed is a seamless, national, full-time, fully-funded, tough and consistent regulator for the securities industry, someone to “kick butt and take names” in the memorable American phrase. If the proposed Canadian Securities Regulatory System is able to do the job, we will be the first to give three cheers and congratulate Canada’s provinces. But we hope we can be forgiven for a degree of scepticism.

Conclusion
If these lessons are applied by Canadian investors, auditors, regulators and stock exchanges, those of us who have suffered from our country’s loss of reputation in 1997-98 may be able to hold our heads up among our international peers, and our country will be able to start realising its full potential.
It’s time for the Canadian capital markets to grow up